We are submitting this letter in response to the request of the Securities and Exchange Commission (the "Commission" or "SEC") for comments regarding proposed Regulation Analyst Certification ("Regulation AC").1

Background

The proposal of Regulation AC represents the latest in a series of steps recently taken by the Commission and other regulators to address concerns raised with respect to apparent conflicts of interest of broker-dealer firms and their research analysts.2 Regulation AC would be applicable to "any broker or dealer, or any person associated with a broker or dealer, that publishes, circulates, or provides, directly or indirectly, a research report prepared by a research analyst" and would require that research analysts preparing research reports for issuance to the public or making public appearances certify that the views expressed are their own. In addition, proposed Regulation AC would require research analysts to disclose whether they have received, or will receive, compensation directly or indirectly related to the specific recommendation or views contained in a research report or made during a public appearance.

As noted by the Commission in the Proposing Release, proposed Regulation AC is intended to cover research reports and public appearances relating to both debt as well as equity securities, and in that respect is much broader in scope than the SRO Analyst Rules, the Merrill Settlement, and the analyst provisions set forth in the Sarbanes-Oxley Act, which cover only equity securities.

The key terms used in proposed Regulation AC would be defined as follows:

"Research report" means a written communication that includes an analysis of the securities of an issuer or issuers, provides information reasonably sufficient upon which to base an investment decision and includes a recommendation.

"Research analyst" means any natural person who is principally responsible for the analysis of any security or issuer included in a research report.

"Public appearance" means any participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public speaking activity in which a research analyst makes a specific recommendation or offers an opinion concerning a security or an issuer.

Comments

Compensation Disclosure

. Although it may appear obvious that the compensation disclosure provisions set forth in proposed Regulation AC are meant to cover only compensation that is intended to influence the particular recommendation or view expressed in the research report or public appearance (and not, for example, ordinary compensation paid to the analyst for preparing the research or making the public appearance), we understand that there has been some question in the industry as to the scope of these provisions, particularly in light of the use of the word "indirectly". Accordingly, we recommend that the Commission clarify that the required certifications with respect to compensation disclosure relate solely to the receipt of compensation intended to influence the particular view expressed by the research analyst.

Use of Certain Terms

. Since the terms "broker", "dealer", and "person associated with a broker or dealer", as broadly defined under the Securities Exchange Act of 1934 (the "Exchange Act"),3 are not limited to entities located in the United States or that are registered (or required to register) with the Commission, we are concerned that the use of such terms in proposed Regulation AC would have the unintended effect of including within the scope of Regulation AC foreign brokers and dealers and other foreign entities (e.g., foreign banks and investment advisers) that issue research reports, at least where such reports may end up in the hands of U.S. investors.4 Given the interests of comity, we do not believe the inclusion of such foreign entities is warranted (nor would it be reasonably expected by U.S. or other investors). Accordingly, we recommend that the Commission amend proposed Regulation AC by providing that the Regulation does not apply to foreign entities (and their associated persons) that are not required to be registered with the Commission under Section 15 of the Exchange Act, or to U.S. broker-dealers (and their associated persons) that distribute in the United States research prepared by a foreign affiliate or any other third party.5

In addition, because the definition of a "person associated with a broker or dealer" includes, in relevant part, "any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer", proposed Regulation AC would also apply to any U.S. entity that issues or distributes research reports, including a bank or investment adviser, if such entity is an affiliate of a broker-dealer, as well as, potentially, to any employee of such an affiliated entity. We believe that the use of the term "person associated with a broker or dealer" is too broad and should be limited in this context to those U.S.-based entities and natural persons that directly or indirectly receive compensation in connection with the preparation of research reports from, or share in the profits of, an SEC-registered broker-dealer (or an intrastate-only broker-dealer exempt from SEC registration).

Disclosure and Recordkeeping Requirements in Respect of Public Appearances

. Proposed Regulation AC would require that "[i]f a broker or dealer, or any person associated with a broker or dealer, publishes, circulates or provides, directly or indirectly, a research report prepared by a research analyst", the broker-dealer must make a record that contains certain specified certifications by the research analyst and, if the appropriate certifications cannot be made, the broker-dealer must disclose such fact in all research reports prepared by the research analyst for the following 120 days. Such records must be maintained by the broker-dealer in accordance with Rule 17a-4(b)(4) of the Exchange Act and must be promptly provided to its designated examining authority.6

Where the research analyst is not employed or controlled by the broker-dealer, however - such as, for example, where a "person associated with a broker or dealer" has distributed a research report prepared by one of its own employees or by a third party - imposing the certification and recordkeeping requirements on the broker-dealer would not appear to be appropriate. Although this burden will be mitigated somewhat if our other suggestions regarding narrowing the scope of the definitions of "broker", "dealer", "person associated with a broker or dealer" and "research analyst" are accepted, we also recommend that this provision be further modified to place the compliance burden on the actual entity responsible for distributing the report.

Consistency with Other Regulations Regarding Research Conflicts

. We note that each of the key definitions set forth in proposed Regulation AC differs in certain respects from the comparable definitions contained in the SRO Analyst Rules and the Sarbanes-Oxley Act. For example, the definition of "research report" in proposed Regulation AC excludes the reference to "electronic" communications that appears in the SRO Analyst Rules and the Sarbanes-Oxley Act, and refers to securities of an "issuer or issuers", rather than securities of "individual companies or industries". The term "research analyst" as used in Regulation AC is also much broader than the comparable terms used in the SRO Analyst Rules and Sarbanes-Oxley Act in that it covers "any natural person", rather than just "associated persons of a member" (in the case of the SRO Analyst Rules) or "associated persons of a registered broker or dealer" (in the case of the Sarbanes-Oxley Act),7 and thus would appear to cover any person, including an employee of a foreign entity or any other third party that prepares a research report that is circulated by a broker-dealer or a person associated with a broker-dealer.

We believe that compliance efforts with respect to proposed Regulation AC, as well as with respect to existing and future rules regarding analyst conflicts of interest, would be significantly enhanced by the use of consistent terminology throughout the rules wherever possible or, at the very least, by an explanation by the Commission (or, with respect to non-Commission rules, other relevant regulatory authorities) of the intended impact of these differences.

In connection with the specific inconsistencies noted above, our views are as follows:

Electronic Communications

. We see no reason to exclude research reports transmitted electronically from the coverage of Regulation AC and would therefore recommend that the definition of "research report" set forth in proposed Regulation AC be conformed in this regard to the definition of "research report" contained in the SRO Analyst Rules and the Sarbanes-Oxley Act.

"Issuers" v. "Companies and Industries"

. We recognize that the use of the term "issuer" (rather than "company") in the definition of "research report" is consistent with the broader reach of Regulation AC to cover debt as well as equity. As for the failure to include a reference to "industries", we assume it is intended to indicate that a research report with respect to a particular industry or market sector (but that does not include a recommendation with respect to a particular issuer within that industry or sector) would not be covered by proposed Regulation AC. We suggest, however, that the Commission make this latter interpretation clear.

Research Analysts

. We believe the definition of "research analyst" set forth in proposed Regulation AC is too broad and should be limited to those natural persons that are principally responsible for the analysis of any security or issuer included in a research report, where such persons are employed by, or directly or indirectly receive compensation from, or share in the profits of, an SEC-registered broker-dealer (or an intrastate-only broker-dealer exempt from SEC registration).

Placement of the Proposed Disclosures

. Consistent with the SRO Analyst Rules, we believe that it would be appropriate to permit the required research report disclosures to be made other than on the cover page of the report, so long as a reference to where in the report such disclosures may be found appears on the cover page. Similarly, as permitted by the SRO Analyst Rules, we believe that proposed Regulation AC should allow the required disclosures to appear in a place other than the report itself if the report covers multiple issuers or securities (so-called "compendium reports"), so long as the report clearly directs the reader to where the disclosures may be found.

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We appreciate the opportunity to comment on the matters discussed in the Proposing Release and would be pleased to respond to any inquiries regarding this letter or our views generally on proposed Regulation AC. Please contact Leslie N. Silverman or Dana G. Fleischman in New York at 212-225-2000 or Edward F. Greene in London at 44-20-7614-2200.

Other steps taken to address analyst conflicts of interest include the adoption by the National Association of Securities Dealers, Inc. (the "NASD") and the New York Stock Exchange, Inc. (the "NYSE") of new rules that, among other things, prohibit a member firm's investment banking personnel from supervising research analysts and approving research reports, prohibit analyst compensation from being tied to specific investment banking transactions, and require certain disclosures about the firm's rating system and potential conflicts of interest resulting from the firm's receipt of investment banking compensation from covered companies (the "SRO Analyst Rules"). The SRO Analyst Rules were approved by the SEC on May 8, 2002. SEC Release No. 34-45908 (May 10, 2002). In addition, on May 21, 2002, the Attorney General of the State of New York entered into a settlement agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated regarding the Attorney General's investigation into Merrill's research practices (the "Merrill Settlement"). Finally, on July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), which, among a wide variety of other provisions, contains provisions intended to address analyst conflicts of interest. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (2002).

For example, pursuant to Rule 15a-6(a)(2) under the Exchange Act, research reports prepared by foreign broker-dealers may be sent directly by such broker-dealers to "major U.S. institutional investors" (as such term is defined for purposes of Exchange Act Rule 15a-6) without the involvement of any U.S. registered broker-dealer. In addition, other U.S. investors may (in accordance with existing Commission no-action positions that were preserved in connection with the adoption of Rule 15a-6) receive foreign-prepared research (without triggering Commission broker-dealer registration requirements for the foreign broker-dealer) if, among other things, an SEC-registered broker-dealer "accepts responsibility" for the report.

This approach is consistent with the approach taken by the NYSE and NASD in the SRO Analyst Rules. See "Joint Memorandum of the NASD and NYSE", Exhibit B to NASD Notice to Members 02-39 (July 2002) (section addressing the "Application of the SRO Rules to Third Party Research").

In this latter regard, we would ask that the Commission clarify that, as we expect, the records are to be provided to the designated examining authority only upon the designated examining authority's specific request, and not automatically as they are created.